Table of contents key findings 1 tuac comments 2 a

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Table of contents Key findings ............................................................................................................................................................................................... 1 TUAC comments ...................................................................................................................................................................................... 2 A supply-side shock magnified by world dependence on China… .................................................................................... 2 …but the economy was weak way before the virus hit ........................................................................................................ 3 A crisis of supply, exposing a more structural issue of demand ....................................................................................... 3 Policies to restore growth ................................................................................................................................................................... 4 The call for maintaining an accommodative monetary policy ........................................................................................ 4 The call for strengthened fiscal policy intervention ............................................................................................................. 5 The necessity of globally co-ordinated and more forceful actions .................................................................................. 6 The longer term policy reform agenda ...................................................................................................................................... 7 References .................................................................................................................................................................................................. 8 TUAC comments A supply-side shock magnified by world dependence on China The coronavirus is a textbook example of what economists refer to as an “external shock”: an unexpected factor outside the standard economic model, which could not be foreseen and that affects economic activity and projections. China, where the coronavirus originated, is paying the highest price in terms of human health and lives, as well as economic output. The necessary containment efforts put in place by the Chinese government impact the ability of labour and factory production to restart across the country. The diffusion of global supply chains makes the world much more inter-connected than ever before, with China representing the global factory for most sectors and links in the chain. Even if the coronavirus proves milder in its impact on human health than previous contagions, such as the SARS in 2003, its effect on the global economy could be far stronger. According to the OECD Trade in Value Added database (TiVA), in 2015 39% of value added in imports across OECD countries originated from China, compared to 31% in 2005. The percentage jumps to 50% when considering manufacturing only, up from 40% a decade earlier. Disruptions in any and multiple supply chains because of reduced activity in China will therefore represent a serious challenge to production elsewhere. Services are affected as well: travel restrictions and bans take their toll. Chinese tourists represent 10% of all cross-border visitors, up to 25% and more in Japan, Korea and other Asian economies. Tourism accounts for 4.5% of GDP and 7% of employment in the OECD
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area, therefore a severe drop in tourism income will have repercussions on the whole economy. …but the economy was weak way before the virus hit Being a supply-side shock, many would argue, there is little governments can do but manage public health and try to preserve people’s confidence in spending, while supply chains recover, production re-starts and the world economy recovers to where it was before the coronavirus hit. However, where was the economy before January 2020? At the end of 2019, the OECD revised world GDP growth to its lowest levels since the global financial crisis of 2008 (OECD, 2019). According to it, GDP growth halted at 2.9% in 2019, and was predicted to remain at around 3% for 2020 and 2021. Figures indicated a marked decrease in manufacturing and industrial output and reflected greater economic uncertainty linked to international trade tensions, particularly between the USA and China, and a weakening global demand.
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